Surprise – Why You Can’t Deduct Your S Corp Losses?

August 15th, 2017 No comments

Your business had a very challenging year. It incurred significant losses but you seemingly have the solace in knowing that you can offset your W-2 earnings and interest and dividend income with those losses. But then you receive unexpected news from your tax professional – you are unable to deduct your S Corp. losses because you lack basis.

What is “basis”? In a nutshell, a shareholder may not deduct expenses of an S corporation Read more…

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IRS Rehires Fired Employees with Conduct Issues

August 8th, 2017 No comments

On July 24, the Treasury Inspector General for Tax Administration (TIGTA) issued a report criticizing the IRS for hiring more than 200 employees with previous conduct and performance issues. The report found that 10 percent of the more than 2,000 former employees rehired by the IRS between January 2015 and March 2016 had been previously fired while under investigation for a substantiated conduct or performance issue.

Of the more than 200 rehired employees, 86 had been “separated” from the IRS while under investigation Read more…

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Self-Prepared Tax Returns

August 1st, 2017 No comments

We get about 4-6 new 1040 clients every tax year who used one of the more popular software programs that allow taxpayers to self-prepare their personal tax returns. They seek our assistance when they get audited by the IRS and discover that their returns had tax errors in them and they owe the IRS significant taxes, interest and penalties.

We currently are representing a taxpayer who the IRS claims owes $40,000. The taxpayer claims that he carefully answered the questions in the software package and can’t believe that he owes the IRS this sum of money.

We are not saying that these tax preparation software packages are faulty, unreliable, and should not be used. Everything in life has its place. If you have a simple tax return with a couple of W-2s and interest income, then these programs are likely perfect for your tax preparation needs. The problem is Read more…

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The Medicare Coverage Trap

July 25th, 2017 No comments

Do not fall into the Medicare coverage trap!

Let’s look at a hypothetical situation. You find yourself retiring and your employer has a very good medical plan. Rather than signing up for Medicare (Part B) which covers the cost of healthcare services like regular physician visits, outpatient surgeries and diagnostic procedures, you decide to go on COBRA to keep your employer’s great health care benefits.

Eventually you notice that your employer’s plan has begun to reject your medical claims.  Since you have religiously been paying your COBRA premiums in full and on time each month, you call the employer’s health care provider to inquiry why it is not paying your medical claims. You learn Read more…

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PA Filial Law and Long-Term Care Insurance

July 18th, 2017 No comments

With the demographically large baby boomer generation moving into retirement, we may see an increasing number of people without the financial resources to support themselves in their golden years. What if these “retirees” do not have the financial resources to pay for the cost of health care, long-term care, or nursing care?

As we discussed in our July 2, 2012 post, YOU may be liable for your relatives’ unpaid bills.

How is this possible? You can become liable for the health care bills of your family members due to Read more…

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Age Discrimination Settlement Lacked Tax Planning

July 11th, 2017 No comments

Unfortunately, it is not uncommon for a taxpayer to take actions without seeking professional advice, be disappointed with the results, and then seek professional assistance to undo the damage. Often times once the initial action has been taken, there is little or nothing that can be done to correct the ill-advised action of the taxpayer.

Let’s look at the case of Ann McKinney v. Commissioner, TC Memo 2017-6. Ann filed suit that her employer provided a hostile working environment based on age and disability. About two years later, the two parties entered into a settlement agreement whereby she withdrew her suit and the employer agreed to pay her a lump-sum payment of $40,000. The agreement stated that Ann held the responsibility to report the amount received for income tax purposes.

The employer issued Ann a Form 1099-MISC (as required by law) reporting as taxable income the $40,000 amount agreed to in the settlement. Ann did not report this income on her personal tax return. Ann later filed an amended Form 1040-X, but again failed to report the $40,000 of income received. The IRS eventually sent Ann a notice of tax deficiency for her failure to report this income.

Ann then argued Read more…

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Planning for College Tuition

June 27th, 2017 No comments

If you are a parent with young children, it is never too early to begin to save for the high cost of a college education. Here are two popular tax-favored programs you can consider. Keep in mind that the earlier you begin to participate in these programs, the greater the amount that will be available for tuition.

Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan is a program established and maintained by a state that allows taxpayers to contribute to an account for paying a student’s qualified higher education expenses. Similarly, private plans, provided by colleges and groups of colleges allow taxpayers to contribute a student’s qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as higher education expense.

Though contributions to 529 plans are not deductible for federal income tax purposes, they are deductible for PA personal income tax. Be sure to read our May 2, 2017 blog regarding PA 529 plan contributions and its restrictions on tax deductions. In addition, PA is considering restricting the tax deductibility of 529 contributions to PA plans only. (The current rules allow tax deductions for contributions made to out-of-state plans).

Coverdell education savings accounts. Coverdell education savings are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expense. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.

Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals.

Contributions are not deductible by the donor and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period.

 

In addition to the above two plans, other ways to save for a college education include: Read more…

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Premium Tax Credit Verification Audit

June 20th, 2017 No comments

The IRS has begun auditing taxpayers who purchased health insurance coverage through the Health Insurance Marketplace (also known as an exchange) and reported that they were eligible for a premium tax credit (PTC) when filing their Form 1040. The IRS audit letter (Form 14950) states that if the taxpayer did not retain the documentation requested by the IRS, s/he needs to contact the appropriate parties to obtain this information.

The information requested by the IRS includes: Read more…

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You Need to Update Your Beneficiaries

June 13th, 2017 No comments

Unfortunately, it seems that every tax season we learn that a client’s spouse passed away and there was no will. Perhaps the plan was to have this matter done at a later date.

Let us assure you that if you do not have a will (or some other form of estate planning), there is no better time than today to get started on your estate plan. You do not want to have your grieving spouse’s life to be further complicated financially and emotionally because no estate plan was in place. Spending a couple of hours thinking about your estate plan may help you avoid costly mistakes and unintended consequences. Topics of discussion you should consider having with a very good estate planning attorney are Read more…

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Know the Tax Rules If Considering In Vitro Fertilization

May 30th, 2017 No comments

In vitro fertilization (IVF) is an expensive medical procedure whereby an egg is fertilized by sperm in a test tube or elsewhere outside the body. An IVF procedure can be tax deductible as a medical expense subject to the same limitations as any other medical expense. The limitation is that such medical expenses are tax deductible to the extent they exceed 10 percent of the taxpayer’s adjusted gross income (AGI). By way of example, if a taxpayer’s adjusted gross income is $100,000 and the taxpayers incurs $12,000 of medical expenses, the taxpayer is allowed a tax deduction of $2,000 ($12,000 less a $10,000 limitation (10% times $100,000 equals $10,000, the limitation).

However, taxpayers have not been entitled to the IVF medical deduction when Read more…

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